Combining Stochastic and MACD (Moving average convergence divergence) Strategies in Trading

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Combining Stochastic and MACD (Moving average convergence divergence) Strategies in Trading

As a trader, having the right indicator helps you recognize changes in stock price patterns. According to experts, combining two suitable indicators helps you achieve better results. Read along to understand how to determine and use a bullish stochastic crossover together with a concurrent bullish moving average convergence divergence crossover. 

Matching the MACD and Stochastic

MACD and the stochastic oscillator work well because the latter compares the closing price of a stock to its price extent across a specific period. MACD is the composition of two moving averages deviating from and gathering together. This combination can be highly effective if traders use it accordingly. 

Operating the MACD

The MACD is a functional trading tool that can disclose price momentum. The MACD also facilitates the identification of price direction and trends. The MACD indicator is robust and can work alone effectively. However, its predictive function is limited. Using the MACD together with another indicator is crucial for a trader’s success. Traders who want to establish the trend direction and strength of stocks can consider covering their moving averages on the MACD’s histogram. 

Operating the Stochastic

Numerous inconsistencies surround the stochastic oscillator’s history. According to various financial resources, technical analyst, George C. Lane created the stochastic oscillator. However, he released conflicting statements regarding its invention, creating doubt about whether he or Ralph Dystant developed it. Chances are that a team of analysts had invented the stochastic oscillator before George claimed its copyright. This oscillator comprises two components. These are the %D and the %K. The %D is the %K’s moving average, while the %K forms the main line displaying the number of periods. 

Knowing the formation process of the stochastic oscillator is crucial. Traders should also understand its effects on various situations. For instance:

  • Some triggers happen once the %K line declines below 20. In this case, the stock is said to be oversold, which is a buying alert. 
  • Should the %K rise slightly below 100 before dropping, you should sell the stock before the value drops further past 80. 
  • When the %K value surpasses the %D, traders should prepare for a buying alert as long as the values remain below 80. If they surpass 80, then the security becomes overbought.

Calculating MACD

Traders need a simple MACD calculation to figure it out. They can deduct the 26-day EMA (Exponential moving average) from the 12-day moving average price of a security. Doing so reveals an oscillating value indicator. After adding the trigger line, also known as the 9-day EMA, the comparison of stochastic and MACD develops a trading opportunity. When the MACD value surpasses the 9-day EMA, it becomes a bullish moving average crossover. You can use MACD in various ways, as seen below.

Traders should be on the lookout for a crossover or differences in the histogram’s center of the line. The MACD indicates sell opportunities below zero and purchase potential above zero. 

Traders should identify the moving average the simple and their significance to operations.

Incorporating Bullish Crossovers

Bullish is a powerful signal for steadily rising prices that happens when a fast-moving average goes past its slow-moving counterpart. This action creates market momentum and predicts more price increments.

In a bullish MACD, this action occurs if the histogram value surpasses the equilibrium line. It can also occur when the MACD line has more value than the MACD signal line. The Stichastic’s bullish divergence happens when the %K value is higher than the %D, suggesting a possible price reversal. 

Why you Should Consider this Strategy

Using two compatible strategies in trading allows traders to wait until the up-trending entry point becomes favorable. They may also want to be sure that a possible downtrend is reversing when working with long-term holds. This strategy can be an ideal scan for specific software. The downside of this strategy is, seeing that stock may take a long time before assuming the perfect buying position, the actual stock trading is less frequent. Traders may need bigger stocks to keep watch. 

Finally

The MACD and stochastic integration strategy allow traders to adjust the intervals and find the right and consistent entry points. Investors and traders can adjust their strategy based on their needs. Before adopting any strategy, you want to understand it extensively.